Market size + Capex on Expansion

January 20, 2009

Estimates abound pertaining to the size of the retail market and the share of organized retail. We refer to the data provided by the India Retail Report, 2009 (IMAGES F&R Research). The report indicates that the retail market is around US$243bn,with organized retail accounting for about 8% of this and forecast to increase to 15% by 2010.For organized retail to reach its potential (as indicated by industry consultants and retail players themselves), significant capital expenditure will need to be incurred. We estimate that the average capex / square foot is in the range of Rs2000-Rs2500/sq foot (including inventory holding costs). We think this number is conservative (especially if one analyzes the details in Pantaloon’s FY08 annual report).

Retail industry participants concur that the average revenue / square foot is around Rs 7000 – 8000 /square foot. This implies that the asset turn in retail (department store format) is around 3-4x.

We do not dispute that the opportunity exists, however, the industry will face an uphill task this year looking from the business case.